On January 7, 2008, this Court granted defendants' cross motion to compel arbitration of this matter pursuant to CPLR 7503 and, conversely, denied plaintiffs' Order to Show Cause seeking, inter alia, that defendants treat plaintiffs as members and/or co-managers of the subject LLCs. At that time the Court reserved decision on plaintiffs' application to disqualify Salon Management as arbitrator on the alleged basis of bias. For the reasons set forth below plaintiffs' motion is denied.

Defendants James Coughlin and Patrick Curley and plaintiff Robert Riddle founded the [*2]defendant businesses Westchester Beach Spa LLC, Fairfield Beach Spa LLC and Yonkers Beach Spa LLC (collectively hereinafter referred to as the "Spas") pursuant to two Operating Agreements dated April 20, 2006, and December 12, 2006. Both of the Operating Agreements contain the following arbitration clause:

In the event that you cannot agree as to any issue that affects each Company or each Company's operations in a significant and/or material manner, then you shall refer this dispute to Salon Management USA, LLC, . . . whose ultimate resolution of each said dispute shall be valid and binding upon each of you.

Salon Management USA, LLC (Salon Management) is the licensor of the "Beach Bum Tanning" trademark under which the Spa defendants operate pursuant to a trademark licensing agreement. As licensor of the trademark, Salon Management receives royalties and advertising fees from the Spas, which must follow various advertising and marketing guidelines set forth by Salon Management. It is not disputed that Salon Management was selected as arbitrator because of its expertise in the ownership and operation of tanning salons.

James Oliver is the CEO of Salon Management and one of its two managing members. Oliver has "personally known the Plaintiff Robert L. Riddle since 1993 . . . approximately one year prior to . . . becoming acquainted with Defendant James Coughlin" (Oliver Affidavit ¶ 4). According to defendant Coughlin, Riddle worked with Oliver in the restaurant business prior to the formation of the Spas. Defendants claim that Oliver left the restaurant business to enter the tanning salon industry and Riddle soon followed. Although Oliver, Riddle and Coughlin contemplated opening a tanning salon together, Oliver never became a member and, instead, helped launch the subject businesses by providing business loans to the Spas. Riddle denies that he had any relationship with Oliver prior to the formation of the Spas and claims that his "relationship with Oliver is entirely through Coughlin and is limited to the [the Spa] business ventures." (Riddle Supplemental Affidavit ¶ 7).

Plaintiffs argue that Salon Management is biased because of Oliver's preexisting relationship with Coughlin, and because Oliver helped fund the Spas (see Riddle Supplemental Affidavit ¶ 11). In addition, Riddle claims that Salon Properties LLC, an entity of which Oliver is a member, is the lessee under the lease for Fairfield Spa, with Fairfield Spa LLC as the sublessee. Riddle adds that he did not consult his own attorney, but rather relied on a Salon Management attorney during the formation of the Spas, the execution of their accompanying leases and the execution of the licensing agreements.

Riddle acknowledges that he "believed at the signing of the Operation Agreements that Defendant Salon would be a fair arbitrator" but now feels that "Salon has already taken a position in this matter without trying to resolve any dispute" (Riddle Affidavit in Opposition to the Cross-Motion ¶ 12). By "Letter of Assignment" dated October 7, 2008, receipt of which is acknowledged by members Coughlin and Curley by email on October 20, 2008, Riddle assigned his membership interest in the Spas to his wife, plaintiff Christel Greene. Plaintiffs claim that Salon Management is biased because, upon Riddle's assignment to Greene, Salon Management, apparently under instruction from defendants,

immediately cut off our access to Web business reports on October 20, 2008, deleted me from the email list maintained by Salon for owners and managers, and [*3]refused to discuss matters with me under the direction of . . . Coughlin and Curley's attorney. All other employees of Salon also immediately stopped all contact with us as of October 20, 2008. (Riddle Supplemental Affidavit ¶ 22).

My client has advised me that your client, Christel Greene, has been in contact with the LLCs' administrative office and the managers of the LLCs to obtain financial records of the LLCs. Please be advised that your client, as an assignee, is not entitled to this information under the Limited Liability Company Law of New York. Please advise Ms. Greene to refrain from contacting directly any of the staff, administration or members of the LLCs. All communication between the parties should be handled through counsel. (Riddle Supplemental Affidavit, Exhibit F)

Oliver attests that Salon Management is not even familiar with all the details of the dispute and has never been asked by any of the parties to arbitrate the dispute (Oliver Affidavit ¶¶ 3-4). Indeed, although Salon Management is a named defendant in this action, the Complaint does not contain any allegations of wrongdoing on the part of Salon Management or assert any causes of action exclusively against Salon Management. Rather, the plaintiffs request an order enjoining the defendants from depriving plaintiffs of their alleged membership rights or, in the alternative, an order directing the dissolution and sale of the Spas. The third and final cause of action alleges breach of fiduciary duty.

Plaintiffs argue that Salon Management must be disqualified because of Oliver's [*4]relationship with the individual defendants prior to and during the formation of the Spas. However, "a party who knows of a relationship between his adversary and the arbitrator and nevertheless assents to the choice of that arbitrator waives his right to later object" (Lincoln Graphic Arts v ROHTA/ New Century Communications, 160 AD2d 871, 872 [2d Dept 1990]; Siegel, 40 NY2d at 690). Therefore, plaintiffs cannot claim bias on the part of Salon Management simply because the individual defendants, as well as Riddle himself, had a preexisting relationship with its managing member, Oliver. Riddle does not dispute that he was aware of the relationship at the time the Operating Agreements were signed and does not claim that the Operating Agreements were signed under duress (see Siegel, 40 NY2d at 691). Therefore, the Court declines to disqualify Salon Management simply because its CEO had a preexisting business relationship with the parties (see Elias Eleni Restaurant Corp. v 8430 New Utrecht Corp., 282 AD2d 705 [2d Dept 2003][refusing to disqualify an arbitrator simply because a business relationship existed between the arbitrator and plaintiff's president]; see also Wien v Rothenberg, 148 AD2d 529 [2d Dept 1989]).

Similarly, any ongoing business relationship between the Spas and Salon Management as the licensor of the "Beach Bum" trademark, does not compromise Salon's ability to be an impartial arbitrator (Id.; see also Lincoln Graphic Arts, 160 AD2d at 872). "The very purpose of arbitration is to have a dispute resolved by persons knowledgeable in a given area" (Matter of Henry Quentzel Plumbing Supply Co., Inc. v Quentzel, 193 AD2d 678 [2d Dept 1993]). It is apparent that the parties selected Salon Management as the designated arbitrator because of its expertise in this industry.

Alternatively, plaintiffs argue that Salon Management's bias is evidenced by its involvement in restricting Riddle and Greene's access to the Spas' financial data and broadcast lists. Defendants allege that the broadcast list is the means by which the licensees of the "Beach Bum" trademark are apprised of "Beach Bum" industry updates and operating procedures and that the Spas asked Salon Management's General Licensing Operations Manager to remove Riddle and Greene from the lists due to Riddle's assignment of his interest to Greene. Thus, defendants argue that it was not improper for Salon Management to notify the Spas of Greene's request to access the financial information and subsequently revoke plaintiffs' access.

The appearance of bias alleged here does not rise to the level of partiality warranting disqualification of an arbitrator. In Rabinowitz v Olewski, cited by plaintiffs, the intended arbitrators received an inflammatory letter linking one of the parties to the Palestine Liberation Organization and accusing him of various criminal acts against Israel (Rabinowitz, 100 AD2d at 539). The court held that the highly inflammatory nature of the letter affected the arbitrators, who were predominantly Jewish, to such an extent that they were permeated with bias and upheld the lower court's decision to select an independent arbitrator (Rabinowitz, 100 AD2d at 540). Similarly, disqualification of an arbitrator was upheld in Uniformed Firefighters Assoc. v City of Long Beach because the intended arbitrator and a party's attorney were "former law partners whose relationship disintegrated and culminated in . . . [an] acrimonious judicial dissolution" (307 AD2d at 365). Here, the ministerial actions of Salon Management's licensing manager do not evidence partiality or show that Salon Management as a whole has become permeated with bias or has even"taken a position" or conducted itself improperly. Indeed, Oliver, Salon Management's CEO, has attested that, at this juncture, he knows very little about the nature of [*5]this dispute. Therefore, in light of the fact that plaintiffs present no evidence that any member of Salon Management has privately consulted defendants regarding the merits of this dispute, has an opinion on what the outcome of this dispute should be, or has otherwise acted improperly with respect to any of the parties (see Goldfinger v Lisker, 68 NY2d 225, 231 [1986]), the Court denies plaintiffs' application to disqualify Salon Management as arbitrator. (See Astoria Medical Group, 11 NY2d at 137 [attack upon impartiality or fairness of arbitrator must be based upon overt misconduct "and not simply on his interest in the subject matter of the controversy or his relationship to the party who selected him"]).

Plaintiffs' motion to disqualify Salon Management as arbitrator of the dispute between the parties is denied. The parties are to proceed to arbitration before Salon Management in accordance with the Court's January 7, 2009 Oral Decision. The matter will be held in abeyance pending arbitration until September 30, 2009 when the case will be dismissed if further Court action has not been sought.

The foregoing constitutes the Decision and Order of the Court.

ENTER



Carolyn E. Demarest

J.S.C.